Tech Stocks Weigh Down Wall Street
Technology stocks pulled Wall Street down Tuesday amid corporate profit warnings and another economic report indicating that U.S. growth was slowing.
The tech-dominated Nasdaq composite index tumbled 43.23 points, or 2.2%, to 1,963.43, its biggest one-day drop since March 15. An index of major semiconductor shares slid to its lowest level since October.
Broader market measures posted smaller losses, but it was the third straight decline for most of the indexes.
Some investors have done an about-face in the last week: Concerns that the economy was expanding too quickly have given way to fears that it might be ebbing, which could hurt corporate sales and earnings -- and undercut stock prices.
Those worries have been deepened by last week’s government report that job growth slowed sharply in June, and by a stream of downbeat reports in recent days from mostly mid-size tech companies.
On Tuesday, Veritas Software Corp. said its sales and profit in the quarter ended June 30 would be below analysts’ estimates. The Mountain View, Calif.-based company, which makes data-storage software, said orders from businesses failed to reach expected levels in the final days of the quarter.
Conexant Systems Inc., a Red Bank, N.J., company that makes computer chips for cable modems and wireless computer networking, warned that its results in the quarter ended Friday would be hit by “extremely low-priced” wireless-chip competition from Taiwan.
Veritas’ shares plummeted $9.55, or 36%, to $17 on Nasdaq. Conexant’s shares slid $1.77, or 43%, to $2.31, also on Nasdaq.
Other tech companies suffered by association. Irvine-based Broadcom Corp., another communications chip maker, slumped $3.78, or nearly 9%, to $39.37 on Nasdaq.
Many analysts said it was too early to view Tuesday’s warnings, and others over the last week, as evidence of a significant slowdown in the tech sector.
“It’s a little premature to make that conclusion now,” said James Ragan, an analyst with brokerage Crowell, Weedon & Co. in Los Angeles. “In general we are still seeing pretty good numbers in terms of corporate technology spending.”
Likewise, for the economy as a whole, “I don’t think we should make too much” of recent weaker data, said Al Kugel, chief investment strategist at money management firm Stein Roe Investment Counsel in Chicago.
“We have these fits and starts during most expansions,” he said.
On Friday the government said the economy created a net 112,000 jobs in June, about half what analysts had expected and down from 235,000 in May.
Another report Tuesday indicated that the economy had decelerated: The Institute for Supply Management said its index of service-sector activity fell to 59.9 in June from 65.2 in May, signaling a slowing expansion.
Although the stock market was broadly lower Tuesday, blue-chip stocks mostly saw modest losses amid subdued trading. The Dow Jones industrial average fell 63.49 points, or 0.6%, to 10,219.34. The Standard & Poor’s 500 index was off 9.17 points, or 0.8%, to 1,116.21.
The tech sector has borne the brunt of the selling over the last three sessions. The Nasdaq index is down 4.1% in that period; the Dow is off 2.1%.
A fresh surge in oil prices on Tuesday darkened investors’ mood, analysts said. Inflation concerns tied to oil may have helped push Treasury bond yields up slightly, even as stocks fell. The 10-year T-note ended at 4.47%, up from 4.46% on Friday. (Markets were closed Monday in observance of the Fourth of July holiday.)
Wall Street’s primary focus now is second-quarter earnings. Most companies will report their results in the next four weeks, and analysts are expecting robust profit growth of more than 20% from a year earlier for the average blue-chip company.
Earnings tracker Thomson First Call in Boston said that among its universe of thousands of companies, the number that had issued warnings about a shortfall in second-quarter results totaled 495, up just slightly from 493 a year ago.
The number of warnings in the tech sector, however, is up nearly 12% from a year ago, to 164 announcements through Tuesday, Thomson said.
The risk for tech stocks is that many of the shares are at high levels relative to expected earnings, said John Bollinger, head of Bollinger Capital Management in Manhattan Beach.
“If the profit growth isn’t there, investors just can’t justify the stock prices,” he said.
Shares of Veritas, for example, were at nearly $30 each in late June. At that level, the stock’s price-to-earnings ratio based on expected 2004 earnings per share was about 30 -- compared with about 18 for the average blue-chip stock.
High stock valuations mean there’s no room for disappointment, Bollinger said. “A lot of people learned that lesson” after the tech sector crashed in 2000 and 2001, he said.
That may make many investors more inclined to flee tech shares quickly this time, analysts say.
Wall Street had been suspicious of the semiconductor sector even before the recent profit warnings. The SOX index of 18 major chip-related companies hit a 22-month high in January, and has struggled since, even as the broader market has rallied. The index fell 4% on Tuesday to the lowest level since October.
Michael Cohen, an analyst with San Diego-based Pacific American Securities, said Conexant’s warning on Tuesday was tied largely to competitive pressures in the so-called WiFi computer networking business. He didn’t view the announcement as indicative of an overall drop-off in chip demand.
“I believe chip demand is very strong and that if there is any industrywide problem, it’s that increased supply has been factored in to meet that demand, resulting in lower average selling prices,” Cohen said.
Still, Tuesday “was a very strange day because all other things I’ve been seeing made me think we’re going into a good earnings season,” he said.
